L1 On Introduction To Documentary Credit April 17 Intake PDF

CDCS MENTOR
…....for Professionals
CDCS exam 2017

(April Intake)
preparation Program
A PRESENTATION BY
Md.
Md. Mohiuddin,
Mohiuddin, CDCS, CITF
1
CDCS MENTOR, Md. Mohiuddin; Cell: 01716308384; e-mail: cdcs.mentor.bd@gmail.com
CDCS MENTOR
Disclaimer
DISCLAIMER
Materials provided in the following slides are for

educational and illustrative purposes only. Although the
information contained herein is believed to be reliable,
the presenter does not assume any responsibility for any
loss that may result from the reliance by any person upon
any information set out hereunder..
2
CDCS MENTOR
About the Facilitator …....for Professionals
Md.
Md. Mohiuddin,
Mohiuddin, The CDCS Mentor
Certi
Certif
tified Doc
Documentar
tary Credit
Credit Speciali
ecialis
ialist (CDCS)
ifs University College (UK) & International Chamber of Commerce
Highest Marks achiever in Bangladesh (Exam 2014)
Certificate in International Trade and Finance (CITF)
ifs University College (UK) & International Chamber of Commerce
Secured 93% Marks (Exam 2016, April)
Part time faculty at

Islami Bank Training & Research Academy, Chittagong &
First Security Bank Training Centre, Chittagong.
Studied Public Administration
At Chittagong University
Diplomaed Associate at Institute of Bankers,
Bangladesh (DAIBB
DAIBB)
DAIBB
Diploma in Islamic Banking (DIB
DIB)
DIB
Serving at Banking industry since 2010
3
CDCS MENTOR
What is International Trade?
4
CDCS MENTOR
What is International Trade?
International trade is the exchange of goods, services or

performance and capital across international borders or territories.
In many ways it is similar to domestic trade. The motivation of all
parties is to gain, by exchanging goods/services/performances that
is surplus to requirements for something that is scarce or
unavailable. This type of trade allows for a greater competition and
more competitive pricing in the market.
Why do businesses trade internationally?
The Comparative Advantage theory of David Ricardo
5
CDCS MENTOR
What makes international trade different from domestic trade?
01. complex Documentation.

02. Extended counterparty risk compared to domestic trade.
03. Foreign currency/exchange risk lead to unexpected financial gains or losses.
04. Introduction of new legislation by overseas governments often unexpectedly.
05. Complex customs and other formalities regarding movement of goods.
06. Extended trade cycle imposing extra strains on working capital requirement.
07. Front for money laundering.
6
CDCS MENTOR
What is a Documentary Credit?
7
CDCS MENTOR
What is a Documentary Credit?
Undertaking:
1. Irrevocable Undertaking Provided/Condition:
1. Stipulated documents presented
2. Issued by a bank 2. All credit terms complied with
3. To make payment/honor
payment/honor
4. To a named beneficiary
UCP600 Article 02: Credit means any arrangement, however named or

described, that is irrevocable and thereby constitutes a definite
undertaking of the issuing bank to honour a complying presentation.
8
CDCS MENTOR
Methods of Payment in International Trade …....for Professionals
There are four main settlement terms in International trade:

1. Advance Payment/Payment in Advance
(Most desirable for the seller, least for buyer)
2. Documentary Collections
3. Documentary Credits &
4. Open Account
(Most desirable for Buyer, least for seller)
9
CDCS MENTOR
Payment in advance
A buyer may make payment to a seller in advance before the goods are
shipped. The reasons for adopting this method may be summarized as
follows:
o The seller may be unwilling to ship goods to the country of the

buyer for reasons of country risk.
o The buyer may wish to encourage the seller into a long-term trade
relationship.
o The seller may not have finance with which to buy or prepare the
goods for shipment.
o The buyer feels comfortable with its relationship with the seller
and with both the credit and country risk of that seller.
10
CDCS MENTOR
Documentary credits
A documentary credit structure provides a seller with an
independent undertaking of a bank for payment.
payment. The buyer, on the
other hand, knows that payment will not be made unless the seller
presents documentary evidence covering the goods and their
shipment.
11
Advantages to the beneficiary of CDCS MENTOR
using the Documentary Credits …....for Professionals
• A truly independent undertaking

• Irrevocable undertaking
• Effective when issued
• Time and content of notice of rejection – preclusion
• Amendments to be agreed
• Incomplete presentations possible which will be completed later
• Electronic presentations acknowledged and have dedicated rule
• Multiple Presentation allowed
• Partial Drawings allowed

• Functional standard for examination of documents
• Transfer
• Assignment of Proceeds
12
Advantages to the Issuing Bank of CDCS MENTOR
• An unqualified statement of independence

• Entire agreement
• An exclusively documentary role
• Document examination diligence limited to determining
appearance of conformity
• Bank risk-weighting
• Exemption from liability if acting in good faith
• Controlled transferability and assignability
• Committed only if agreed
• Instructing party’s indemnity
13
Advantages to the Applicant of CDCS MENTOR
??????????????????????????????????????????????????????????????
Please identify/mention Minimum Five Advantages

on your own logic and understanding
14
CDCS MENTOR
Documentary collections
Process of trading through documentary collection:
collection:
Step 01:
01: the seller ships the goods to the buyer in the importing
country.
Step 02:
02: It hands over to its bank shipping documents relating to the
goods and their shipment. Examples of common documents are bills
of lading, commercial invoices, insurance documents and certificates
of origin.
Step 03:
03: The bank forwards these to a correspondent bank in the
buyer’s country, which may be the bankers of the buyer, to handle the
documents in accordance with the instructions of the seller, as
instructed by the seller’s bank in its collection instruction usually
delivery against payment or Delivery against Acceptance.
15
CDCS MENTOR
Documentary collections
1. Under documentary collection, banks only manage or channeled

the documents, without giving any payment undertaking or
guarantee.
2. Documentary collection offers the seller less security than a
documentary credit but, in return, the costs are lower.
lower.
3. The full security of a documentary collection applies only if the
transport document is a negotiable bill of lading and / or if the
goods are consigned to the bank in the importing country, with the
consent of that bank.
4. Documentary collection may be used as a tool/medium for arranging
short term credit through accepted Draft or promissory note.
note.
16
CDCS MENTOR
Open Account
Process of Open Account Trading:
Trading:
Step 01:
01: the seller dispatches goods to the buyer without any
guarantee of payment.
Step 02:
02: the seller sends the buyer an invoice together with other
appropriate documents for payment on an agreed date or at the end
of an agreed period.
Step 03:
03: The buyer makes arrangements to pay on the relevant date
according to the terms of the sale contract. The buyer may use any
appropriate payment method, such as an international bank
transfer or bank draft, absent any specific request of the seller.
17
CDCS MENTOR
Open Account
A seller may make shipment to a buyer in advance before the payments are
received. The reasons for adopting this method may be summarized as follows:
o The buyer may be unwilling to pay to the seller before satisfied of
the quality of the goods.
o The seller may wish to encourage the buyer into a long-term trade
relationship.
o The seller feels comfortable with its relationship with the buyer and
with both the credit and country risk of that buyer.
o Open account trading is most commonly used when the two
companies concerned have a long-
long-established trading relationship.
18
CDCS MENTOR
Open Account
01. It is simple to administer.

02. involves minimal banking fees or other costs.
03. The system is particularly attractive to buyers because it affords
them the opportunity of examining the goods before they have to
make payment.
04. Sellers using open account methods obtain no security for
payment and have to rely entirely on the creditworthiness and good
faith of the buyer.
05. The only involvement by banks in open account trading is in the
transfer of funds on behalf of the buyer to the seller.
19
CDCS MENTOR
Who is it that undertakes to make payment under

a documentary credit?
a. The applicant.
b. The advising bank.
c. The issuing bank.
d. The nominated bank.
C
20
CDCS MENTOR
Name the main purpose of a documentary credit.
a. To undertake payment to a beneficiary.
b. To give shipping instructions to a beneficiary.
c. To eliminate risk in performance under the purchase

or sale contract.
d. To ensure the applicant receives transport documents.
A
21
CDCS MENTOR
What is the main benefit of an irrevocable documentary

credit to the beneficiary?
a. Assurance of receipt of goods.

b. Assurance of receipt of payment.
c. Assurance of importer’s creditworthiness.
d. Assurance of issuing bank’s creditworthiness.
B
22
CDCS MENTOR
Your customer is an exporter. Which payment term

exposes it to least risk?
a. Open account.
b. Documentary credit.
c. Payment in advance.
d. Documentary collection.
C
23
CDCS MENTOR
Your customer is an importer. Which payment term

exposes it to least risk?
a. Open account.
A
24
CDCS MENTOR
Which payment term is most desirable

to an exporter?
a. Open account.
C
25
CDCS MENTOR
Which payment term is most desirable

to an importer?
a. Open account.
A
26
CDCS MENTOR
Historians traced the use of letters of credit back as early as ancient

Egypt and Babylon.
In the eighteenth century the term ‘letter of credit’ became widely
used and recognized in connection with traveller’s letter of credit.
From the 1840s, among banks in London, documentary credits began

to serve as a means of facilitating payment for foreign trade
transactions.
27
CDCS MENTOR
Traveller’s Letters of Credit
Were issued by the banks in the western world to provide their

clients with a means of obtaining cash during their overseas travels.
Were issued in the form of a letter and were addressed to the

bank’s overseas correspondent or agent. It indicated that the issuing
bank would honour bills of exchange drawn on it by the
correspondent or agent in respect of amounts paid to the named
traveller, plus any charges incurred by the correspondent or agent.
A maximum amount that could be drawn and an

expiry date were indicated.
28
CDCS MENTOR
Traveller’s Letters of Credit
A prerequisite for the issuance of a traveller’s Letter of Credit was a

formal letter of introduction addressed to the to the issuing bank’s
overseas correspondent or agent. This letter, usually sent in advance of
travel, requesting that the correspondent or agent provide the client
with any necessary assistance.
The issuing bank’s client (beneficiary of the credit) always retained
possession of the original letter of credit.
Each correspondent or agent was required to indicate on the original
letter of credit details of amounts paid and the relevant dates so that the
next correspondent or agent to whom the client presented the credit
would be able to ascertain the balance available to be drawn.
29
Traveler's-
Traveler's-type letter of credit: From the archives of the US Library of Congress
CDWas
CSissued
MENTORby
…....for
the USProfessionals
govt. to
Washington. US of America. July 4. 1803. facilitate the
Lewis & Clark
Dear Sir
In the journey which you are about to undertake for the discovery of the course
and source of the Missouri and of the most convenient water communication
from thence to the Pacific ocean, your party being small, it is to be expected that
you will encounter considerable dangers from the Indian inhabitants. Should you
escape those dangers and reach the Pacific ocean, you may find it imprudent to
Thomas Jefferson Meriwether hazard a return the same way, and be forced to seek a passage round by sea, in
3rd President of the USA Lewis such vessels as you may find on the Western coast. But you will be without
(1801–1809) American money, without clothes, & other necessaries; as a sufficient supply cannot be
explorer, carried with you from hence. Your resource in that case can only be in the credit
soldier, and of the US for which purpose I hereby authorise you to draw on the Secretaries of
public State, of the Treasury, of War & of the Navy of the US according as you may find
administrator your draughts will be most negotiable, for the purpose of obtaining money or
(2nd necessaries for yourself & your men: and I solemnly pledge the faith of the United
Governor of States that these draughts shall be paid punctually at the date they are made
Louisiana payable. I also ask of the Consuls, agents, merchants & citizens of any nation with
Territory) which we have intercourse or amity to furnish you with those supplies which
your necessities may call for, assuring them of honorable and prompt retribution.
William Clark
And our own Consuls in foreign parts where you may happen to be, are hereby
American
instructed & required to be aiding & assisting to you in whatsoever may be
explorer,
soldier, and necessary for procuring your return back to the United States. And to give more
public entire satisfaction & confidence to those who may be disposed to aid you, I
administrator Thomas Jefferson, President of the United States of America, have written this
(4th Governor letter of general credit for you with my own hand, and signed it with my name....
of Missouri) Th: Jefferson
30
The primary objective of Lewis and Clark Expedition was to
CDCS MENTOR
explore and map the newly acquired territory (through Louisiana
Purchase from France for USD15.00 Million dollar in 1803), find
a practical route across the Western half of the continent, and
establish an American presence in this territory before Britain and
other European powers tried to claim it.
31
CDCS MENTOR
What is UCPDC?
Ώ UCP IS A SET OF PRIVATE RULES
Ώ FORMULATED BY INTERNATIONAL CHAMBER OF COMMERCE (ICC)
Ώ USED IN GOVERNING LETTER OF CREDIT (DOCUMENTARY CREDIT)

PRACTICE.
Ώ MOST SUCCESSFUL SET OF PRIVATE RULES FOR TRADE EVER

DEVELOPED.
32
CDCS MENTOR
The
aftermath of
World War I
resulted
founding of
ICC and
ultimate
formulation
of UCP.
33
CDCS MENTOR
ICC Was founded in 1919

with an aim to bring economic
prosperity to a world that was
reeling from the devastation of
World War I.
The Merchants of Peace:

Founders of ICC
International Secretariat is
situated at Paris, France.
The largest and most

representative business
organization in the world.
ICC Has Three main activities:

(i) Rule setting
(ii) Dispute resolution
(iii) Policy Advocacy
34
CDCS MENTOR
Why UCP was introduced?
ICC HAD ITS PRIMARY OBJECTIVE TO FACILITATE THE FLOW OF

INTERNATIONAL TARADE AT A TIME WHEN NATIONALISM AND
PROTECTIONISM POSED SERIOUS THREATS TO THE WORLD
TRADING SYSTEM.
UCP WAS INTRODUCED TO ALLEVIATE THE CONFUSION CAUSED BY

INDIVIDUAL COUNTRIES’ PROMOTING THEIR OWN NATIONAL
RULES ON LETTER OF CREDIT PRACTICE.
35
CDCS MENTOR
Why UCP was introduced?

1. To obtain global common understanding of Documentary credits.
2. To obtain global common interpretation of Documentary credits.
3. To obtain global common application of Documentary credits.
UCP supplemented by:

by:
1. ICC Uniform Rules for Bank to Bank Reimbursement Under
Documentary Credits (URR 725)
2. ICC supplement to the Uniform Customs and Practice for
Documentary Credits for Electronic Presentation (eUCP) version 1.1
3. International Standard Banking Practice for the examination of
Documents under Documentary Credits (ISBP 745); 2013 revision
36
CDCS MENTOR
First UCP (UCP82)- 1933

Revision 01 (UCP 151)- 1951
Revision 06 (UCP 600)-
600)- 2007
(the latest version of UCP)
37
CDCS MENTOR
Ώ Sixth revision of UCP

Ώ Came into effect on 1st July, 2007.
38
CDCS MENTOR
Fill in the gap.

UCP600 is the……………. Version of UCP.
A. 5th B. 6th
B. C. 7th D. 8th
C
39
CDCS MENTOR
Implicit Assumption of UCP
BANKERS ARE NEUTRAL AND HONEST.
40
CDCS MENTOR
CASES OF NON PERFORMANCE AND

FRAUD ARE NOT COVERED BY UCP.
WHEN IN CONFLICT WITH LOCAL LAWS,

LOCAL LAWS PREVAIL.
Limitations of UCP
41
CDCS MENTOR
UCPDC stands for:
A. Uniform Customs and Practices for Documentary Credit

B. Uniform Customs and Practice for Documentary Credit
C. Uniform Customs and Practice for Documentary Credits
D. Uniform Custom and Practices for Documentary Credits
E. Uniform Custom and Practice for Documentary Credit
C
42
CDCS MENTOR
43
CDCS MENTOR
44

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CDCS MENTOR

CDCS exam 2017

Materials provided in the following slides are for

Part time faculty at

What is International Trade?

What is International Trade?

International trade is the exchange of goods, services or

Why do businesses trade internationally?

The Comparative Advantage theory of David Ricardo

What makes international trade different from domestic trade?

01. complex Documentation.

What is a Documentary Credit?

What is a Documentary Credit?

UCP600 Article 02: Credit means any arrangement, however named or

There are four main settlement terms in International trade:

o The seller may be unwilling to ship goods to the country of the

• A truly independent undertaking

• Partial Drawings allowed

• An unqualified statement of independence

Please identify/mention Minimum Five Advantages

1. Under documentary collection, banks only manage or channeled

01. It is simple to administer.

Who is it that undertakes to make payment under

Name the main purpose of a documentary credit.

a. To undertake payment to a beneficiary.

b. To give shipping instructions to a beneficiary.

c. To eliminate risk in performance under the purchase

d. To ensure the applicant receives transport documents.

What is the main benefit of an irrevocable documentary

a. Assurance of receipt of goods.

Your customer is an exporter. Which payment term

Your customer is an importer. Which payment term

Which payment term is most desirable

Which payment term is most desirable

Historians traced the use of letters of credit back as early as ancient

From the 1840s, among banks in London, documentary credits began

Traveller’s Letters of Credit

Were issued by the banks in the western world to provide their

Were issued in the form of a letter and were addressed to the

A maximum amount that could be drawn and an

A prerequisite for the issuance of a traveller’s Letter of Credit was a

Ώ UCP IS A SET OF PRIVATE RULES

Ώ FORMULATED BY INTERNATIONAL CHAMBER OF COMMERCE (ICC)

Ώ USED IN GOVERNING LETTER OF CREDIT (DOCUMENTARY CREDIT)

Ώ MOST SUCCESSFUL SET OF PRIVATE RULES FOR TRADE EVER

ICC Was founded in 1919

The Merchants of Peace:

The largest and most

ICC Has Three main activities:

Why UCP was introduced?

ICC HAD ITS PRIMARY OBJECTIVE TO FACILITATE THE FLOW OF

UCP WAS INTRODUCED TO ALLEVIATE THE CONFUSION CAUSED BY

Why UCP was introduced?

UCP supplemented by:

First UCP (UCP82)- 1933

Ώ Sixth revision of UCP

Fill in the gap.

Implicit Assumption of UCP

BANKERS ARE NEUTRAL AND HONEST.

CASES OF NON PERFORMANCE AND

WHEN IN CONFLICT WITH LOCAL LAWS,

UCPDC stands for:

A. Uniform Customs and Practices for Documentary Credit